Generous Tax Breaks Make Tax Reform Difficult

STEPHEN OHLEMACHER | Associated Press

WASHINGTON (AP) – Nine in 10 Americans will find the maze of credits, deductions and exemptions on their tax forms so confusing and difficult that they'll hire someone or turn to special computer software to fill out their returns. Even the commissioner of the Internal Revenue Service says he pays someone to do his taxes.

President Barack Obama and key lawmakers from both political parties say it's time for a serious national discussion about making the tax code simpler and fairer. It's going to be a long talk, one that could last years. Why? Because every deduction, exemption and credit, every layer of complexity, is important to somebody, in some cases millions of somebodies.

"That's what the tax code is now, it's a whole set of winners and losers," said Howard Gleckman, a fellow at the Urban Institute and editor of TaxVox, a blog on tax issues. "If you reform it, you're going to create new winners and new losers, and the losers always scream much louder than the winners cheer."

There is a lot of political support on Capitol Hill for simplifying the tax code. But in the new era of divided government, it is unclear whether Obama has the ability, or the political will, to steer such a massive piece of legislation through a Republican-controlled House and a deeply divided Senate.

"We're examining whether we can find the political support for a comprehensive tax reform," Treasury Secretary Timothy Geithner said at a recent economic forum.

The Senate Finance Committee started holding hearings on tax reform last year, and chairman Max Baucus, D-Mont., plans more this year. The House Ways and Means Committee held its first hearing on the issue Thursday.

"I am under no illusion that the task before us will be easy," said Rep. Dave Camp, R-Mich., chairman of Ways and Means. "To really reform the tax code in a way that lowers the tax rate, broadens the base and promotes the competitiveness of American companies, we will need to make some tough choices."

Congress isn't used to making tough choices when it comes to taxes, said Eugene Steuerle, a former Treasury official who worked on the last tax reform package that passed Congress, in 1986. For much of the past decade, lawmakers have simply borrowed to pay for spending projects and tax cuts.

"Most of the members of Congress have never engaged in legislation that identified the losers – who's going to pay for government, who's going to pay to get the budget in order," Steuerle said. "They're not used to that type of legislation."

The tax code is 3.8 million words long and growing. In the past decade, there have been 4,428 changes – an average of more than one a day, according to a recent report by Nina E. Olson, the National Taxpayer Advocate, an independent watchdog within the Internal Revenue Service.

"In my view, the tax code today is a mess," Olson told the Ways and Means Committee hearing. "Since the last major reform 25 years ago, the tax code has become an ever-expanding patchwork of discrete provisions, often with little logical connection, and it has become unreasonably difficult for taxpayers to understand. "

Camp has his own description: "The tax code is 10 times the size of the Bible, with none of the good news."

The tax code has long been a vehicle for social policy. Lawmakers use it to reward people for having children, buying a home and making donations to charities. There are even tax breaks for paying taxes. Businesses are rewarded for investing in new equipment and buildings, spending on research and development, and producing alternative forms of energy.

In all, the tax code is filled with a total of $1.1 trillion in credits, deductions and exemptions, an average of about $8,000 per taxpayer, according to Olson's analysis of data provided by the nonpartisan Joint Committee on Taxation, Congress' official scorekeeper on revenue issues.

For perspective, the federal budget deficit was $1.3 trillion last year, which raises another thorny issue: Should tax reform be used to increase overall tax revenues to reduce the deficit? Many politicians, both Democrats and Republicans, say trying to use tax reform to raise taxes would only make it harder to build support for an overhaul.

Obama has repeatedly said he wants to simplify the tax code by broadening the tax base and lowering the tax rates. That means reducing the number of credits, deductions and exemptions – for businesses and individuals – so lawmakers can lower the overall tax rates while still raising the same amount of tax revenue.

The law is packed with tax breaks that help narrow special interests. But, Olson points out, many of the biggest tax breaks benefit millions of American families at just about every income level, making them difficult to touch.

In 2009, nearly 35 million taxpayers got a tax break for paying interest on their home mortgages, and nearly 36 million taxpayers took the $1,000-per-child tax credit. About 41 million households reduced their federal income taxes by deducting state and local income and sales taxes from their taxable income.

"The dirty little secret is that the largest special interests are us – the vast majority of U.S. taxpayers," Olson said. "Virtually all of us benefit from certain exclusions from income, deductions from income, or tax credits."

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